If you make a decent living, and you’ve found ways to slash some of life’s biggest expenses, you’re naturally left with a surplus of cash every month. The next step is to get that money working for you ASAP by investing it. But this whole stock market thing can be kinda scary, and maybe you’re not sure how to get started.
The good news is that you don’t need to devote your life to becoming a master trader to make money in the stock market. Actually, one of the most effective ways to make your money grow involves almost no effort at all.
Note: We are not financial advisors. We’re just a couple of bloggers honestly sharing what has worked for us. This article contains personal opinions for your consideration, not professional financial advice. Check out our Disclosures page for more information.
Why You Should Start Investing in Stocks Right Now
You’re very likely to live a long time, and the magic of compound interest works best over extended periods, like your lifespan. For example, a one-time initial investment of $10k into the stock market at age 25 could grow to $329k by age 60, but the same $10k invested at age 40 only amounts to a 60th birthday gift of $74k*!
It’s not really about being rich when you’re old though. For us, investing is about financial independence — the point where your investments can pay for all your living expenses, rendering your job obsolete and buying you freedom. But regardless of your investing goals, the sooner you start, the sooner you’ll see results.
With that said, there is one reason you might not want to start right away: debt. If you owe money, you may be better off paying your debt down as quickly as possible until it’s all gone, and then investing your excess money afterward. This is particularly true for high-interest debt like credit cards, personal loans, and student loans. The higher the interest rate, the more urgent it is to pay it off. Consider that option before you get too “invested” in investing.
An Easy, Passive Stock Investing Approach is Best
When most people think of the stock market, they imagine trading — buying specific stocks and hoping they rise in value so they can be sold soon afterward at a higher price. Unfortunately, research shows that investors who actively trade stocks on their own usually perform poorly.
That makes sense because when you trade stocks, you’re effectively competing against everyone else in the market (including professionals) and hoping that you’re smarter than they are. Fortunately, to make money in the stock market, you don’t need to compete against anyone. There’s a much better way.
For centuries, the entire stock market as a whole has been consistently rising in value and paying out dividends. Companies come and go, and there have been major ups and downs over short periods of time, but over the course of any person’s lifetime, the overall stock market seems to always rise — by a lot.
So if there were just some way we could tie our money to every stock simultaneously, we could skip all the short-term buying and selling. Our money would just grow over the long run without us doing anything. In fact, this is the exact way we invest in stocks, and it’s really easy to do with these things called “index funds.”
When you put your money into a stock market index fund, it’s invested into hundreds or thousands of different companies, indiscriminately. You’re not going it alone, and you’re not paying some big shot fund manager a multi-million dollar salary to trade for you all day. Instead, you’re investing money in a wide variety of businesses, automatically.
Let me give you a specific example: If you buy shares of VTI, the Vanguard Total US Stock Market Index Fund, you’re actually buying a tiny slice of ownership in almost every publicly traded US company at once. If you hold on to it for a long time, your money will grow at about the same rate as the US stock market as a whole — no effort required. VTI is one of the main index funds we own ourselves.
It’s worth mentioning that VTI only includes the US stock market. Some people prefer to diversify internationally, and Vanguard actually offers another index fund, VT, which includes thousands of stocks from across the planet (including the US), so that’s a great option to consider instead of VTI. Or, you can combine VTI (US-only) with VXUS (non-US only) to achieve the same goal.
A key advantage of most index funds is that they’re very inexpensive to maintain. VTI, for example, has total annual expenses of just 0.03%. For comparison, if you invest in an actively managed fund (where trades are placed on your behalf by experts), you may be charged fees as high as 1-2% of your portfolio’s entire value per year. That’s like 50 times more expensive!
Most importantly, there is a lot of evidence that the performance of these broadly diversified index funds is the same or better than professional money managers on average, so you’re coming out ahead not only on convenience and expenses, but performance, too.
BUT, like any risky asset, that return comes in a very lumpy form. Stock prices may dramatically rise or sharply plummet over short periods of time, and NOBODY knows when or by how much. The key is to ride it out for a very long time and bank on that average upward trend. (2/2)— Trip Of A Lifestyle (@TOALifestyle) April 26, 2020
How to Invest in Stocks Today
Alright, so maybe you’re convinced to invest in stocks, but how do you actually do it when you’re ready? First, you need to open a brokerage account. It’s sort of like a bank account, but you can use the money inside of it to buy stocks and other investments. If you ever need to access the money, you simply sell those investments and transfer the cash to your regular bank account.
Brokerages used to charge high fees for these services, but nowadays, most good companies don’t charge any commissions for buying and selling stocks at all. We’ve personally worked with Vanguard, TD Ameritrade, and Fidelity — and all three are great. You can buy shares of those Vanguard index funds we’ve been talking about inside of a brokerage account with any company, not just a Vanguard account.
The most basic brokerage account type is called a “taxable” brokerage account. There are no limits to the amount of money you can contribute to this type of account, and there are no early withdrawal penalties or age restrictions on the funds inside. However, profits and distributions inside of this type of account may be subject to taxes. If you’ve opened a generic brokerage account somewhere without specifying any type, it’s probably a taxable brokerage account.
Other types of brokerage accounts, such as Traditional IRAs, Roth IRAs, HSAs, and 401(k)s offer more favorable tax treatment by the IRS (they’re really cool!), but each one carries a specific set of contribution and withdrawal restrictions that you need to understand before considering them. The taxable brokerage account is the simplest to understand.
By the way, all of the index funds discussed in this article are called exchange-traded funds (ETFs). Each of them is also sold as a mutual fund, which is the same product in a different package. The mutual fund version of VTI is VTSAX, the equivalent of VT is VTWAX, and the equivalent of VXUS is VTIAX. The differences are minimal and mostly unimportant, but we personally invest in the ETF versions. Here’s how to place an order for an ETF inside of your brokerage account (the instructions for mutual funds would be slightly different):
Read These Important Notes Before Buying Anything
If this article is the only literature you’ve ever read on stock investing, you should do some more research before actually buying your first shares.
Here’s some more stuff to look into and learn from:
- First of all, realize that investing in the stock market involves risk. You can lose money. I recommend getting a gauge for how that risk could play out and making sure that any money you put into the stock market is money you can leave invested uninterrupted for many years. You should not invest money you expect to need to spend in the short term.
- Stocks are not the only investment vehicle out there. Along with rental real estate, stocks tend to be high-risk, high-return investments. Most bonds, on the other hand, are lower-risk and sport lower average returns. Vanguard also has a Total US Bond Market Index Fund under the ticker symbol BND that you can consider adding to the mix if you want to be more conservative.
- Just because something is called an “index fund” doesn’t mean that it’s automatically great. The ones we’ve talked about in this article have low fees and broad diversification, which are important advantages.
- You might be wondering why I didn’t mention the S&P 500, which is one of the most popular indexes to track. There’s nothing wrong with a good S&P 500 index fund like VOO or VFIAX (they will probably perform very similarly to VTI). However, we personally prefer index funds that track the entire stock market, including smaller companies, rather than only the 500 companies that Standard and Poor’s index decides to track.
- In addition to the rest of this blog, I highly recommend the JL Collins Stock Series for investing beginners. If you want something more comprehensive, pick up a copy of The Simple Path To Wealth, which is one of the best investing and personal finance books I’ve ever read.
* This was calculated assuming a 10.5% annualized rate of return, which is pretty close to the US stock market’s actual average over the last century or so. The rate of return in the future could be higher or lower; nobody knows for sure. I kept the calculation simple and did not account for taxes or inflation. Dividend reinvestment was included.